A Human Capital Investment Tax Credit

Tom Peters

A century ago, in 1887, Procter & Gamble installed a profit-sharing plan that divided profits between the company and its workers in the same proportion that labor costs bore to total costs. That is, if wages were 50 percent of costs, the workers’ bonus would be one-half of profits. President Cooper Procter stated at the time, “The chief problem of big business today is to shape its policies so that each worker will feel that he is a vital part of his company with a personal responsibility for its success and a chance to share in that success [my emphasis].”

Sadly, Procter’s analysis is equally apt today. Only about 15 percent of the U.S. work force participates in a profit-sharing or productivity-based gain-sharing plan, and just 10 percent owns shares of stock in their company, despite the generous incentives granted by 1974’s historic Employee Share Ownership Plan legislation.

Former General Motors director H. Ross Perot observes, “Despite spending $40 billion for robotics-equipped plants and other capital improvements, GM lost market share and went from being the low-cost producer to the high-cost producer among the Big Three.” Indeed, GM’s technologically driven Saturn project stumbles, while the relatively less automated New United Motor Manufacturing Inc. (NUMMI) joint venture between GM and Toyota soars. As well, Ford’s leap past GM has been led by employee involvement—partly because in 1980 it could not afford to spend lavishly on exotic automation.

Robert Hall, Indiana University professor and president of the American Production and Inventory Control Society, points out, “Manufacturing excellence results from making something a little bit better every day, [utilizing] every employee’s skill … Spending big money quickly on automation is not wise.” Everyone’s involvement is also central to the Japanese productivity and quality successes.

Involvement means entry-level training, regular retraining, and constant skill upgrading. It means a chance to render suggestions and participate in their rapid implementation. The clincher is rewarding employees whose productivity and quality-enhancing activities benefit the firm.

I have concluded reluctantly that management will not get on with extensive involvement programs in time to reverse our accelerating economic decline. I therefore propose a sweeping human-capital agenda, which I call a Human Capital Investment Tax Credit, or H-ITC.

The objective is to provide big dollar incentives for employers to better train and then involve workers. It also aims to generate incentives for workers to accept a radical shift of compensation plans from a fixed-pay basis to a more uncertain incentive-pay emphasis. We’ve long awarded bonus incentives to our executives based upon performance—why not to our workers, whose contributions increasingly are intellectual, not physical? Once more, Japan is a role model. Variable compensation for workers there averages 25 percent of gross wages.

Combining the ideas in Martin Weitzman’s highly regarded The Share Economy, those in widely respected TRW policy analyst Pat Choate’s The High-Flex Society, those of other kindred spirits, and my own observations over the last decade, I propose the following:

(1) For employers, a 10 percent, old-fashioned Investment Tax credit would be allowed on wages distributed as bonuses via formularized profit-sharing and productivity-based gain-sharing plans. Employers also would receive a 10 percent Investment Tax Credit for gross training and retraining/skill-upgrading/pay-for- knowledge expenditures.

(2) For employees, a 50-percent tax exemption, possibly with limits, for all W-2 income from profit-sharing productivity-based gain-sharing plans. (Such a bold incentive would be required to compensate for greater uncertainty—lower pay in bad times—and to overcome employee skepticism dating back to the epic abuses of piecework pay. It also would up the odds of support from the unions and Democrats.)

(3) To aid workers displaced by competition, I principally suggest the idea of an Individual Training Account, or ITA, as Choate and some others have labeled it. Tax-deductible contributions by employees, similar to IRAs, of up to $5,000 might be made over a 10-year period. The money would revert to the employee at retirement or some such time, but upon displacement would be issued, in voucher form, for use in certified training programs.

Numerous other provisions deserve consideration, including beefed-up child care, increased portability of pensions, higher incentives to employees and employers to induce more employee share ownership.

How will it be paid for? Over the mid to long haul this should be a supply sider’s dream, Weitzman and others convincingly contend. That is, the H-ITC likely would induce a drop in unemployment (Weitzman claims that it could virtually eliminate unemployment if properly conceived), and would increase productivity—thereby generating taxes that would more than offset the price tag. In the short term, the costs surely would be substantial. But I, for one, would not seek to ameliorate them through a slow phase in. There is no time to waste.

In his State of the Union, President Reagan said that to remain number one (which he apparently thinks we still are) in the 21st century, we must pursue an individual, corporate and government “quest for excellence.” The contribution of the American worker must become once more the backbone of this urgent quest. More widespread capitalism—via strong incentives to tie pay to performance and contribution—is an essential step.